Five years ago, Brendan Kennedy had to psych himself for a tough conversation with his wife, Maria. Until that point, Kennedy had taken a pretty straightforward path for a tech entrepreneur. He’d launched two successful companies. He’d earned an MBA from Yale. He’d been the COO of Silicon Valley Bank Analytics, which provides research to venture-backed companies.

But one day, Kennedy found himself in the awkward position of sitting down with Maria to tell her he was ditching the tech industry to start selling weed. More specifically, he wanted to start Privateer Holdings, a private equity firm that would acquire and create cannabis brands. It wasn’t a career change that Kennedy and his two co-founders, close friends from Silicon Valley Bank Analytics and Yale, took lightly.

“We were really worried about reputational risk,” he recalls. “We all had good educations and legitimate careers prior to this. Would this venture somehow taint us moving forward?”

Yet the possibilities ahead were irresistible. The laws against marijuana in the United States seemed to be toppling one state at a time. Marijuana was increasingly accepted by the medical community as a treatment option. Kennedy and his partners believed it was only a matter of time before recreational marijuana would also be widely legalized. A brand new market was opening before their eyes, currently valued by some counts at $2.7 billion (though others have pegged it much higher) and expected to reach $8.2 billion by 2018. And they would not even need to build the consumer base, since nearly half of Americans consume the product, including 6.5% of high school seniors, who smoke it daily. It was a flawless business plan, except for one little thing: the drug still carried stigma. Their challenge would be to bring cannabis out of the shadows and transform it into an everyday product, like wine or coffee. Their mission was to rebrand pot.

WE ASSUME THE END OF PROHIBITION IS INEVITABLE AND THAT THE PRODUCT IS ALREADY MAINSTREAM.

The first people they pitched were their families who, to their great surprise, quickly saw their vision and offered their support. But they found that lawyers and bankers were a harder sell. To the average professional services firm, the weed business carried way too much risk. “We started a lot of fights in law firms where half the partners wanted to work with us and the other half said there was no way they would be associated with us,” Kennedy says. “It took months to find the right firms to do marketing, branding, account, PR, and payroll. I had 25 different conversations with banks and the vast majority turned us down.”

Their hesitations are understandable. Marijuana is still a dangerous business from a legal perspective. Today, state and federal laws surrounding the drug are literally all over the map. In Alaska, Colorado, Oregon and Washington, both recreational and medicinal marijuana are already legal, or will be in the next few months; this is also true in the cities of Portland and South Portland in Maine. There are 23 states, plus the District of Columbia, where medical marijuana is effectively decriminalized. But in each state, laws have their own nuances and inconsistencies. In Washington, for instance, employers have the right to fire workers who test positive for marijuana on a drug test, even with a doctor’s note. Or if you wanted to set up a medical marijuana dispensary in New York, that might involve importing marijuana plants through states where they are not legal. And since the federal government considers marijuana illegal, it is almost impossible for marijuana businesses to get a traditional bank account in any state, since banks fear being prosecuted for aiding and abetting illegal drug dealers.

Privateer has set up headquarters in Seattle, which legalized cannabis in 2012. But employees at the company are constantly moving between legal and illegal spaces as they gather information about the supply chain, visit cannabis growers and develop products. Since laws are constantly in flux, what is above board one week might be a criminal offense the next. “It’s not a comfortable feeling,” says Kennedy, who is now Privateer’s CEO. “As we did research, we had to walk a lot of illegal cannabis rows: when I say illegal, sometimes that is at a state and federal level, while in other places, it is just at a federal level.”

For three veterans of the tech industry who were used to spending their days in plush Silicon Valley offices, walking dirty, unpaved marijuana groves took a little getting used to.

But Privateer has a roadmap in place to remove the negative stereotypes associated with the plant. It starts with simple things like dressing like entrepreneurs, in suits and preppy-smart casual outfits. It involves picking the right words. Cannabis is the only term for the drug in the Privateer lexicon, since its synonyms—weed, ganja, dope, hash, reefer, among many, many others—have less savory, and less business-minded connotations. The Privateer strategy is also about changing the overall conversation. “We have created a language that would allow us to speak about the industry maturely and professionally,” Kennedy explains. “We assume the end of prohibition is inevitable and that the product is already mainstream.”

This rebranding effort has been working so far. Privateer already has three companies under it’s belt: Tilray, a medical cannabis company in British Columbia catering to Canadian patients; Leafly, an online resource to help people find the right marijuana strain, among other utilitarian tools; and Marley Natural, a high-end product line launching later this year, and operated in part by the estate of the late reggae superstar Bob Marley. Privateer has attracted over 200 employees who all come from blue-chip companies like Microsoft, T-Mobile, Starbucks and Amazon. Over time, even lawyers and bankers wanted to work with Privateer. Kennedy has discovered that it takes a particular personality to join forces with him: these people are visionaries, who can see the possibilities ahead even though they are not fully realized. Many are drawn to the opportunity to change history by helping to decriminalize the drug.

Take Founder’s Fund, Peter Thiel’s investment firm, for example, which participated in Privateer’s $75 million Series B investment round. According to Geoff Lewis, a partner at Founder’s Fund, the murky legal status of cannabis actually made the venture more attractive. After all, Founder’s Fund has a history of investing in companies trapped in a regulatory grey area, such as SpaceX, Airbnb, and Lyft. “We invest in industries where we have a clear conviction that the regulatory issues are going to be sorted out in the mid-term,” Lewis explains. “Cannabis fits that bill.”

The Cannabis Market Rush

Founder’s Fund believes that now is the right time to be investing in cannabis, given that the end of prohibition appears to be in sight. According to projections by the Marijuana Policy Project, an organization lobbying legal reform, the majority of states will have legalized marijuana by 2020. While Privateer is hoping to capture the very top of the market, by creating premium cannabis brands, thousands of other entrepreneurs around the country are hoping to get in while they can. There’s a gold rush taking place—or green rush, if you will—as new companies pop up every day, developing a wide range of products for every possible cannabis consumer. “The explosion of this market is happening sooner than I would have guessed,” Lewis says. “When we first started looking at this space, we didn’t think it would blow up until there was some sort of federal legalization in place. But it’s happening right now.”

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The Fired-Up Activists

Another reason that cannabis entrepreneurs feel so much camaraderie is that many believe that the legalization of the substance is not just a business issue, but also one involving social justice. Virtually every person I spoke with for this story mentioned the social impact of criminalizing a substance that is so widely consumed. “There are activists and political campaigners who show up to work everyday, trying to end prohibition,” Kennedy says. “Our approach is to end it through professional business conversations. We see it as just another form of activism.”

In the U.S. there are more arrests for marijuana possession each year than for all violent crimes combined, which is equivalent to an arrest every 48 seconds. A total of 20 million Americans have been arrested on charges of marijuana possession since 1965 and African Americans are nearly four times as likely as whites to be charged, even though the two groups use the drug at similar rates. “The war on drugs, was essentially a war on people who use marijuana,” says Paul Armentano, deputy director of NORML, an organization founded in 1970 to protect the rights of the marijuana consumer.

“The question is whether it is worth using the full force of the state and law enforcement to target someone who chooses to consume a product that is objectively safer than many other legal intoxicants. It’s about whether prohibition does more harm than good.”

But activists like Armentano don’t believe that their goals are always fully aligned with those of the marijuana business community. He believes that the investment pouring into this nascent industry would be better spent on actually trying to change the marijuana policy. His view is shaped by the sheer number of people he sees on a daily basis who are arrested and sentenced to prison time for marijuana possession charges. “I think it is highly premature to focus capital on the cannabis industry when it is still impossible to get a bank account to operate a cannabis business,” Armentano says.

“That capital should be going towards the reform organizations that are trying to change the landscape so that this industry will eventually be allowed to flourish.” He also points out that the Obama administration has been largely progressive as far as marijuana legislation is concerned, but that could change in 2016 when a new president comes into office. “Without changes in federal law, everything is still very tenuous,” he says.

Daryl:
Nice Blog Claire, the industry is already massive and still in it's in...

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